New Banking Rules Seen Leveling Playing Field

Under the new rules, some international banks already operating in India and some new banks entering the market will be required to set up local subsidiaries and abide by many of the same rules as Indian banks.

For foreign banks, India may finally start to shine.

Analysts say new banking rules announced Wednesday will make it easier and more appealing for big names such as Standard Chartered Plc and even regional banks such as Singapore’s DBS Group Holdings Ltd. to ramp up their retail operations in India.

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“The [rules] are giving foreign banks a level playing field to compete with the domestic banks in terms of network, in terms of access to local markets,” said Robin Roy, associate director of financial services at PricewaterhouseCoopers in India.

Under the new rules, some international banks already operating in India and some new banks entering the market will be required to set up local subsidiaries and abide by many of the same rules as Indian banks. However, those subsidiaries will be permitted to open more branches and to raise money in local debt markets.

Until now, foreign banks in India have operated as branches of their parent banks, and have faced strict limitations on the number of branches they can open and how they raise funds.

“It’s bound to change the landscape,” Mr. Roy said.

Increased competition may even spur a round of consolidation among mid-tier Indian lenders, according to analysts at CLSA. “While expansion of foreign banks can increase competition and costs, it may also support M&A prospects among the mid-cap private banks,” they said in a note.

Morgan Stanley strategists said operating as a subsidiary would offer foreign banks two main benefits: broadly equal treatment of branch-expansion plans by regulators and the potential to more easily buy Indian banks.

“This is much more liberal than the current guidelines,” they said in a note.

Still, it won’t all be plain sailing. Expanding across India will be expensive at a time when the world’s biggest banks are feeling the strain of tough new capital-requirement rules.

What’s more, India’s economy has been hit hard. It is expected to grow at less than 5% for the financial year that ends in March, its worst pace of growth in more than a decade.

Still, signs of stabilizing economic growth, a return of foreign capital and suggestions that lawmakers have a growing appetite for reforms bodes well for India, said Udith Sikand, an analyst at GK Research.

“The political climate seems finally to be turning more favorable to economic reform,” he said.

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